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Real or Ridiculous? The Hemline Index

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Fashion and finance may not be such close cousins after all.

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The shorter the skirt, so they say, the stronger the economy. Women tend to cover their legs when the economy slumps.

The precise origins of the Hemline Index, as it's known, are unclear. The phenomenon was reportedly first noted by Wharton business school professor George Taylor in 1926, when hemlines rose with flapper dresses during the Roaring '20s. Once the Great Depression set in, hemlines fell to the floor once again.

Originally, there were several theories behind the observation. Perhaps it was because women couldn't afford their silk stockings during tough times and chose to cover their bare legs instead. Others surmised that the indicator is a leading one -- when times were flush, designers could afford more fabric and began making longer skirts. When the economy inevitably fell again, tailors cut back on their budgets and sketched shorter designs.

Over the decades, the economic premise, which has also been called the "Bull Market and Bare Knees" theory, gained traction, at least among the media. Chart the rise and fall of hemlines with the Dow and you just might convince yourself it's legitimate. After World War II in the '50s, hemlines rose with poodle skirts as the economy rebounded. The economy's expansion continued uninterrupted into the 1960s, when the mini-skirt made its splashy debut. Toward the end of that decade, an economic malaise took over and with it came floor-length hippy skirts.

We still see some evidence of the Hemline Index working today. The ubiquity of the short baby-doll dress in 2006 when the housing market peaked gave way in 2007 to the long and flowing maxi dress just as the economy crumbled.

It's a fun theory and sometimes a compelling one, but investors will have a hard time profiting from it.

For starters, there's little evidence that it really is a leading indicator. The trends in hemlines tend to occur at precisely the same time the economy is experiencing its ups and downs, not before it.

And since fashion design has come a long way since the flapper dress, it's almost impossible to really pin down the time and place of a new trend. The clothes we wear are inspired by fashion designers, who create their art for the catwalk well in advance of the time you can by a look-alike off the rack at the Gap. What's fashionable at the fall fashion shows in New York's Bryant Park next month won't actually morph into something we're seeing on the streets for several seasons.

More importantly, fashion is a vast industry, which affords shoppers with more choice than ever. Every season will see popular hemlines of varying length. "You would have to be on crack to think that designers are all going to move in the same direction," Barneys creative director told New York magazine of the Hemline Index last year. "There is, thank God, a fabulous diversity."

And don't forget that trends in fashion tend to have shorter lifespans than economic cycles. That maxi dress that was popular in 2007? Now it's totally 2007, and yet the economy is still in the dumps.

If you still need more evidence that the Hemline Index is little more than a fun topic for cocktail conversation, take a look at what's popular in stores right now. At Banana Republic and J.Crew, the dress options range from micro mini length (after all, leggings are still "in") to touching the floor.



No matter which one you pick, you'll probably still feel the same way about your 401(k).

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No positions in stocks mentioned.
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